China FAW absorbs small-car company


The deal gives FAW access to Toyota, which itself wanted an entrypoint into China's luxury-car market

Staff and wire reports

SHANGHAI, China -- China's largest carmaker, China FAW Group Corp., is absorbing small-car maker Tianjin Automotive Xiali Co.

FAW, or First Automotive Works, is the largest maker of Chinese-brand cars. It has now taken a 51 percent stake in Tianjin from that company's parent, Tianjin Automotive Industry Corp.

The deal is the biggest merger to date between Chinese car companies. It gives FAW, which specializes in high-end sedans, access to a partnership with Toyota Motor Corp., Japan's largest car company.

Tianjin signed a 50-50 joint venture with Toyota in 2000. They began making Xiali-brand compact cars in October.

FAW had been in talks with Toyota on a deal to give the Japanese carmaker access to the Chinese luxury car market (full story).

No assets or cash exchanged

FAW is absorbing troubled Tianjin and its debts for free, since the government ultimately owns both parent companies.

FAW is also taking over Tianjin's 75 percent share in Tianjin Huali Auto, which makes minicars.

Tianjin Xiali is expected to trim around 75 percent of its 40,000 employees over the next two years and trim its production. The company lost 87 million yuan ($10.5 million) last year and ended it with debts of 4.1 billion yuan ($496 million).

Toyota had pushed for a restructuring before investing more money in Tianjin. FAW and Toyota will now build a second factory, develop a new model of FAW luxury car and make parts for Toyota's LandCruiser four-wheel drive in China.

FAW makes the Hong Qi sedan, popular with Chinese executives and dignitaries.

Shares lower on Monday

Tianjin Automotive Industry owned 85 percent of its Xiali subsidiary. Tianjin Xiali stock is traded only on the domestic A share market, not open to international investors.

Its shares opened higher on Monday, but a broad downturn in Asian stocks has seen it settle 1.03 percent lower at 6.70 yuan in morning trade.

Most of Japan's largest carmakers have been looking to expand production in China, where labor, land and raw material costs are cheaper (full story).

China's government is also preparing state-owned enterprises for competition under World Trade Organization rules.

According to a report in the Business Weekly publication, it has pushed China's three largest car companies -- FAW, Shanghai Automotive Industry Corp. and Dongfeng Motor Corp. -- to buy up weaker car companies.